A hundred billion little bits

| Staff Writer

Bitcoins have had an interesting history. Created in 2009 as a way to circumvent traditional credit agencies and make online transactions cheaper, they have gone on to be the currency of choice for money launderers, people who wish to purchase illicit items and most recently, speculators. For the uninformed, a bitcoin is an anonymous cryptocurrency. It’s anonymous because unlike online credit providers such as PayPal, the currency is not necessarily tied to a user’s actual identity in a meaningful way. It is a “cryptocurrency” because each individual “coin” and each coin fraction, usable to a fraction of 10^-8, is actually just a list of transactions for which that “coin” has been used. The creation of new “coins” is tied to the processing of previous transactions, which is done using cryptographic operations, making it similar to code breaking. The way a bitcoin is created makes it very difficult, if not impossible, to counterfeit in the traditional sense. Nevertheless, the creation method has exposed other flaws within the currency itself that make it easy for technologically savvy criminals to abuse.

In recent months, Bitcoin has been noticed by mainstream media sources for its wildly fluctuating value. Practically worthless when it was first created, the currency was worth less than $15/per coin in December 2012. By January 2014, it had peaked at a value of more than $1,200 a coin, sometimes even doubling in value to approach the $1,200 high. Since then, bitcoins have halved in value and are worth a little less than $600 a coin at press time.

While these fluctuations and Bitcoin’s inherently anonymous nature have been very popular among certain groups, these features also make Bitcoin a terrible currency except for the most fringe uses. Bitcoin’s anonymity is a double-edged sword: it turns out that the real-world protections given to typical currency by credit providers are great for combating fraud. For example, over the past few months, 744,408 coins were stolen from one of the largest bitcoin exchanges in the world, Mt. Gox. What happened to these 744,408 coins that users entrusted to Mt. Gox? Poof. Vanished. Gone. Irrecoverable. When Mt. Gox finally froze all transactions, it had lost $32.75 million in assets and accrued $174 million in liabilities, mostly in an unguaranteed currency that had proven easy to steal.

Of course, there are solutions to this: governments could step in and begin regulating cryptocurrencies like they do for their own currencies of goods in general. However, this would inevitably remove the Bitcoin anonymity, which is what led to its popularization in the first place. In their current states, Bitcoin and other cryptocurrencies are constantly engaged in a technical battle, attempting to ensure that their customers’ coins are safe against criminals. This massive risk is part of what led to the boom and subsequent crash in Bitcoin value.

Nevertheless, because Bitcoin is so risky, it is unlikely to ever enter the mainstream. It certainly still has its uses—among those who wish to keep their transactions entirely anonymous or those who wish to engage in very risky financial speculation—but for normal people who do not engage in black market activity, it simply offers too few advantages over normal currencies for the massive risks that are involved. Of course, there are a lot of other reasons, both technological and economic, that make Bitcoin unlikely to ever go mainstream, but the inherent risk means that this new technical innovation is simply not useful for most people.

Sign up for the email edition

Stay up to date with everything happening as Washington University returns to campus.

Subscribe